Tesco (245p) is in trouble. The appointment of Dave Lewis from Unilever as CEO – the first outside hire in the firm’s long history – is the final acknowledgment that the group could no longer ‘grow its own’, a trait that had long characterised its corporate structuring. Fears of a profit warning dragged the shares to a new 10-year low on Wednesday, a fifth cheaper than in January, and now cheaper than it was a decade ago.
HSBC expects Tesco to cut its current year dividend by half to 7.25p – this in anticipation of a selloff of international and non-core business and writedown on the value of UK stores spelling further trouble. Many of these have already been sold to the grocer’s own pension fund. A 34 per cent drop over the past year makes Tesco the second-sharpest faller in the FTSE 100 – only industry peer Wm Morrison has fared worse. Winds of change are afoot in the supermarket sector, and they are blowing against the ruling incumbents.
Charting The Decline Of Tesco
On Friday, July 18th, 2014, Richard Broadbent, Tesco’s chair, told embattled chief of three years, Philip Clarke, that he would be losing his job. For Mr. Clarke, it was an ignominious end to his four decades working for the retailer. But it was also the culmination of a host of adverse factors which had been brewing for some time against the long-established grocery group.
Notable dates on the timeline of demise are easily recited: January 2012, the group’s first profit warning in 20 years causing a wipe of £5bn from its market capitalisation; April 2013, the announcement that annual pre-tax profit was down 50%; April 2014, a further drop of 6.9% from underlying profits parallelling a share price fall of 80 points. But statistics can only tell one side of the story. What has really bitten into Tesco’s fortunes has been their inability to notice the change in consumer culture happening around them.
For most of his three-year tenure as chief executive, Mr Clarke aspired to position the group to satisfy the demands of the discerning modern shopper. Part of this was a move to accommodate the trend for greater in-town and internet shopping. Tesco’s website was spruced up; its online checkout made more intuitive. It was the first supermarket to venture into hardware, releasing a budget tablet. The Tesco branches in out-of-town locations were bestowed with extras like branded restaurants to make them more appealing to travelling consumers; a day out, perhaps, rather than a shopping trip. These choices were made with the best intentions; indeed, they weren’t necessarily bad decisions. They just weren’t those most urgently needed within the changing business climate.
In fact, Mr. Clarke’s main faults lay not in what he did, but what he failed to do. He reacted too slowly in reining in the group’s foreign expansion, which was on a hiding to nothing. Tesco’s prices were also drifting too high as cheaper competition like German chains Aldi and Lidl gained market share through relentless undercutting. He lost sight of the basics, and his inertia in responding to what was happening around him has cost him dearly.
Some have blamed Tesco’s woes exclusively on the extra competition globalisation has brought upon established British chains. But discounters like Aldi and Lidl, not to mention the current influx of pound shops, are nothing new. Stores of their ilk were a prominent feature of the groceries scene in the 1980s, before the unmatched choice retailers like Tesco could offer established its market dominance.
No, the real responsibility for recent developments lie closer to home. Tesco just hasn’t been able to decide what it wants to be: whether it should target the market share of up-market brands like Waitrose and Marks and Spencer, or wrestle with the German newcomers in the bargain basements. The prosperous middle ground it has enjoyed so long alongside fellow Big Four quadrumvirate members Wm Morrison, Asda, and Sainsbury, is no longer stable. A growing inequality in Britain has meant customers either feel rich or feel poor, and their behaviour reflects as much.
But there are other, broader changes in shopper behaviour which haven’t helped either. With more irregular working hours, characterised by new-fangled creations like zero-hours contracts and options to work from home, people no longer schedule a weekly shop at a remote superstore. They are increasingly likely to favour a local convenience store, and may make more regular visits to simply top up what they already have, rather than grab the bulk of supplies in one go.
These problems would have been difficult enough to deal with, had they not been worsened by a culture of change at corporate level. When Mr. Clarke joined Tesco in 2011, he was unable to stop an immediate exodus of the cadre of senior managers assembled by Sir Terry Leahy, his predecessor – notable amongst them Andrew Higginson, who has recently taken the helm at fellow ‘Big Four’ supermarket struggler, Wm Morrison. The writing for this beleaguered chief executive, sadly, was on the wall from the beginning.
Out With The Old, In With The New
Of course, there will be fairly few envious eyes cast towards Dave Lewis, the man who has been saddled with enacting the turnaround to this slide. The odds are stacked high against him. He has no experience of retail or leading a public company. The last time someone from a marketing background like Lewis’ led a large grocer was Laws Olofsson at Carrefour, who lasted three turbulent years and five profit warnings before deservedly getting the boot.
But Mr. Lewis is a big personality – said Andrew Seth in his book The Grocers and Supermarket Wars, ‘There is no question that this fellow can be radical’ – and perhaps this will work in his favour. His appointment may just bring the fresh ideas this venture so desperately needs. His next steps will be fascinating. Speculators have suggested that the main priority should be to cast aside the distractions which coloured Clarke’s reign, and turn instead to three basic pillars: price, service, and stores. This is a compelling argument, especially considering the success Tesco had pursuing that route in the first place, when it made itself Britain’s crown king of supermarkets. But there are fears that playing this game would be on the terms of, say, Lidl and Aldi, and would result in embarassing defeat.
Unless, of course, Tesco plays foul, using its position as market leader to deliberately make a loss on certain lines in order to win back Aldi and Lidl converts, as Amazon infamously did with undeniable success to independent bookstores. “The overriding strategy has to be price,” says Richard Hyman, the analyst who runs the Richard Talks Retail website. “Tesco has to be cheapest on everything all the time.” This is easier said than done. Tesco’s price gap with Aldi may be around 20 per cent, while the gap with Asda is in high single digits. The price-slashing operation could hit profits by £2bn to £4bn. But it would almost certainly work to rebuild the group’s customerbase. And, despite their weakened position of late, only Tesco have the resources to do it.
A more strategic route, though riddled with potential pitfalls, would be to split the UK business, operating hardline discounts in areas where the German bargainmongers have a foothold (and thus the price is likely to matter most) and charging more upmarket prices in affluent areas. After all, does a Russian oligarch in London really need low prices when he buys his groceries? The likes of this manouevre have never been seen before. But, again, desperate times call for desperate measures. And Tesco, so used to the dizzying highs of success, desperately need something to pull them out of the soul-searching malaise of the last few years.
Britain has fallen out of love with Tesco, and it is sure to require drastic measures to rebuild the relationship. It may just be that Michael Lewis is the unlikely man to rekindle the customer connection of bygone years. With German usurpers breathing down the group’s neck, perhaps it is their national team which should provide the model for resurgent success; Lewis needs to play fast. Offensively. And perhaps, just perhaps, a little dirty.
Words: Richard Saint
Image: Joshua Lelliott